SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended . . . . . . . . . . . . . . . . . . . . September 30, 1995
Commission File Number . . . . . . . . . . . . . . . . . . . . . . . 0-17838
Microtel Franchise & Development Corporation
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(Exact name of Registrant as specified in its charter)
New York 16-1312167
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State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
One Airport Way, Suite 200, Rochester, New York 14624
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(Address or principal executive offices) (Zip Code)
(716) 436-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 30, 1995, the Registrant had issued and outstanding
3,266,267 shares of its $.001 par value common stock.
The total number of pages in this report is 20.
The Index of Exhibits filed with the Reports is found at Page 20.
Page 1 of 20
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 and 1994, AND THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
OPERATING REVENUES:
Hotel revenues $ 1,703,742 297,016 $ 2,843,933 710,902
Beach club income 511,461 481,482 1,198,550 1,131,971
Management fees -
Nonaffiliate 73,520 116,986 136,335 230,077
Affiliate 208,378 142,797 352,148 272,386
Royalties 144,360 104,659 253,089 182,902
Franchise placement income 55,500 51,750 80,500 102,250
Development fees 80,000 78,250 120,000 203,250
Miscellaneous -- 16 5,500 47
----------- ---------- ----------- ----------
Total operating revenues 2,776,961 1,272,956 4,990,055 2,833,785
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,320,986 1,125,667 4,187,548 2,266,299
----------- ---------- ------------ ----------
Income from operations before depreciation and amortization 455,975 147,289 802,507 567,486
------------ ------------ ----------- ----------
DEPRECIATION AND AMORTIZATION 120,202 111,691 240,404 222,129
------------ ------------ ------------ ----------
Income from operations 335,773 35,598 562,103 345,357
------------- ------------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest income 45,861 56,168 123,431 124,450
Interest expense (227,429) (180,898) (459,062) (362,975)
Gain on Repurchase of Franchise Rights --- --- 150,000 ---
------------- ------------- ------------ -----------
Total other income (expense) (181,568) (124,730) (185,631) (238,525)
Income from operations, before income taxes, minority
interest and equity on net losses of affiliates 154,205 (89,132) 376,472 106,832
PROVISION (BENEFIT) FROM INCOME TAXES 40,750 (1,825) 83,849 (2,593)
------------- ----------- ----------- -----------
Income from operations, before minority interest, and
equity on net losses of affiliates 113,455 (87,307) 292,623 109,425
MINORITY INTEREST 91,048 149,222 32,512 54,534
EQUITY INCOME/(LOSSES) OF AFFILIATES 14,619 28,397 16,444 (16,280)
------------- ----------- ----------- -----------
NET INCOME $ 219,122 90,312 $ 341,579 147,679
============= =========== =========== ==========
NET INCOME PER COMMON SHARE $ 0.05 0.02 $ 0.08 0.03
============= =========== =========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
Page 2 of 20
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995
(unaudited)
_________________________________________________________________________________________________________________________
ASSETS 1995
- ------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 239,864
Accounts receivable - trade 229,861
Inventories 100,196
Prepaid expenses and other 423,708
Accounts and notes receivable -
Affiliates 234,557
Nonaffiliate 594,129
-----------
Total current assets 1,822,315
----------
INVESTMENTS IN PARTNERSHIP INTERESTS 2,293,712
-----------
INVESTMENT IN LAND 1,686,687
-----------
PROPERTY AND EQUIPMENT, NET 6,505,492
-----------
DEFERRED TAX ASSET 682,091
-----------
OTHER ASSETS:
Mortgage and note receivable - Affiliate 1,400,000
Deposit 254,661
Intangibles and other assets 185,064
-----------
Total other assets 1,839,725
-----------
Total assets $14,830,022
===========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
Page 3 of 20
_________________________________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1995
---------------------------------------- ----
CURRENT LIABILITIES:
Line of credit $ 895,000
Accounts payable - trade 327,216
Accrued payroll and related taxes 84,015
Accrued interest 47,792
Other accrued expenses 279,041
Notes payable - affiliate 170,000
Current portion of long-term debt 122,867
Obligation under franchise agreements 1,750
Deferred revenue - Beach Club 96,203
Deferred franchise revenue - current 55,000
Customer deposits 6,100
----------
Total current liabilities 2,084,984
-----------
LONG-TERM DEBT 8,546,000
-----------
DEFERRED FRANCHISE REVENUE 100,000
-----------
DEFERRED REVENUE - LAND SALE 185,055
-----------
LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS 1,098,381
----------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 3,266
Additional paid-in capital 7,013,522
Warrants outstanding 60,000
Accumulated deficit (4,138,626)
-----------
2,938,457
Less 49,142 shares of common stock in treasury, at cost (122,855)
-----------
Total shareholders' investment 2,815,602
-----------
Total liabilities and shareholders' investment $14,830,022
===========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Page 4 of 20
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATION STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
(unaudited)
____________________________________________________________________________________________________________________________________
Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital Warrants Accumulated Treasury
Stock Preferred Stock Common Outstanding Deficit Stock Total
--------- ---------- ---------- ----------- ----------- ----------- --------- -----
BALANCE, March 31, 1995 $ 295 $1,560,705 $3,161 $5,187,217 $105,000 ($4,416,545) ($125,000) $2,314,833
Net income -- -- -- -- -- 341,579 -- 341,579
Exercise of stock options -- -- 105 260,245 (45,000) -- -- 215,350
Sale of treasury stock -- -- -- 5,355 -- -- 2,145 7,500
Cash dividends paid on
preferred stock -- -- -- -- -- (63,660) -- (63,660)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30, 1995 $295 $1,560,705 $3,266 $5,452,817 $60,000 ($4,138,626 ($122,855) $2,815,602
====================================================================================================================================
Stock balances at March 31, 1995:
Common stock: 3,111,067 shares; Preferred Stock: 294,723 shares
Stock balances at September 30, 1995:
Common stock: 3,266,267 shares; Preferred Stock: 294,723 shares
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
Page 5 of 20
MICROTEL FRANCHISE AND DEVELOPMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1995 and 1994
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 341,578 $ 147,679
Adjustments to reconcile net income to net cash
from operating activities:
Deferred tax benefit 83,040 (5,000)
Depreciation and amortization 240,587 222,129
Other income (150,000) --
Minority interest in earnings (32,512) (54,534)
Non-cash consulting 15,875 --
Equity in net losses of affiliates (16,444) 16,280
Capital distributions from unconsolidated
partnership interests 19,692 27,597
Acquisition of prepaid franchises (200,000) --
(Increase) decrease in assets -
Accounts receivable - trade 234,848 245,277
Inventories (7,349) 4,700
Prepaid expenses (46,766) (180,678)
Increase (decrease) in liabilities -
Accounts payable 101,873 20,388
Accrued payroll and related taxes (14,691) (74,836)
Accrued interest (10,525) 13,104
Other accrued expenses 40,776 104,098
Deferred revenue - Beach Club (520,274) (468,320)
Customer deposits (69,967) 77,580
Deferred franchise revenue (75,000) (77,250)
------------ ------------
Net cash provided by operating activities (65,259) 18,214
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land (590,730) (150,000)
Capital contribution to unconsolidated partnership interests (269,500) (636,500)
Collection on affiliate notes receivable 488,437 426,440
Increase in non-affiliates accounts and notes payable 170,000 --
Increase in non-affiliates accounts and notes receivable (160,434) (73,455)
Purchase of equipment (120,781) (60,769)
Cash received for options exercised 222,850 --
Deposit - Management Contract -- (200,000)
Change in other assets (112,568) (46,001)
----------- -----------
Net cash used in investing activities (372,726) (740,285)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partners (68,700) (141,040)
Payments of debt (101,837) (92,576)
Borrowings on line of credit, net 579,000 50,000
Dividends paid (63,660) (63,660)
----------- ------------
Net cash provided by (used in) financing activities 344,803 (247,276)
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (93,182) (969,347)
CASH AND CASH EQUIVALENTS - beginning of period 333,046 1,149,041
---------- ----------
CASH AND CASH EQUIVALENTS - end of period $ 239,864 $ 179,694
========== ==========
The accompanying notes to financial statements are an integral part
of these consolidated statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 459,587 $ 363,446
========== ==========
Income taxes $ 28,256 $ 6,723
========== ==========
Page 6 of 20
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
(unaudited)
1. Basis of Presentation
In the opinion of Management, the interim financial statements included
herewith reflect all adjustments which are necessary for a fair statement
of the results for the interim periods presented. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's financial statements in the March 31, 1995 10-KSB.
Other footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements
and notes included in the Company's March 31, 1995 10-KSB.
2. The Company
On April 1, 1994, Microtel completed a statutory merger of Hudson Hotels
Corporation. As a result of the merger, the former (Hudson Hotels
Corporation) company will be referred to as Hudson Hotels, a division of
Microtel. The division provides a full menu of hotel services including
development, operations, management, sales and marketing, business systems,
financial management and food and beverage management.
3. Litigation
On October 26, 1990, a complaint was filed in Palm Beach County Circuit
Court, Florida, by Seagate Beach Quarters, Inc., a Florida corporation,
seeking damages plus interest and costs, against Rochester Community
Savings Bank ("RCSB"), a New York based bank, and naming Hudson as a co-
defendant. On December 6, 1990, Delray Beach Hotel Properties, Ltd., a
Florida limited partnership controlled by Hudson, purchased the Seagate
Hotel and Beach Club from Rochester Community Savings Bank. The Purchase
Contract includes an indemnification of Hudson against any action resulting
from previously negotiated contracts between RCSB and third parties. The
requested relief in this case, Seagate Beach Quarters, Inc., vs. Rochester
Community Savings Bank, etc., et al, including Hudson Hotels Corp., etc.,
was based on allegations that RCSB, through its subsidiary, Shore Holdings,
defaulted in its obligations under a Contract for Purchase and Sale, and
failed to go forward with the transaction due to tortious ongoing
negotiations between RCSB and Hudson, and that there was a breach of
contract by RCSB. RCSB is diligently defending this suit, and is holding
Hudson harmless. On March 17, 1994, the court granted summary judgement in
favor of all defendants. That judgement has been appealed; on appeal, the
summary judgment in favor of Hudson was reversed. Attorneys for Hudson are
preparing a motion for rehearing or clarification. On September 8, 1994,
Seagate Beach Quarters, Inc., sued Delray Beach Hotel Properties, Ltd.,
Delray Beach Hotel Corp. and Shore Holdings, Inc., in a cause of action for
conspiracy and tortious interference with a business relationship based on
essentially the same facts stated above. On January 27, 1995, the Court
issued an order dismissing the amended complaint as to Delray Beach Hotel
Properties, Ltd. Plaintiff has field a notice of appeal
Page 7 of 20
from that order. On September 18, 1995, Seagate Beach Quarters, Inc. filed
a notice of voluntary dismissal against Delray Beach Hotel Properties, Ltd.
On February 11, 1993 a complaint was filed in the Western District of New
York, United States District Court, by John Miranda, Susan Miranda and
Christopher Miranda, seeking damages and costs against Quality Inn
International, Choice Hotels International, and naming Hudson as a co-
defendant. The requested relief in this case, John Miranda and Susan
Miranda and Christopher Miranda vs. Quality Inns International Inc., Choice
Hotels International, Inc., Ridge Road Hotel Properties, Ridge Road Hotel
Properties d/b/a Comfort Inn, a/k/a Comfort Inn West, Hudson Hotels Corp.,
and Jennifer L. Ansley, as Executrix of the Estate of Loren G. Ansley, was
based on allegations that John Miranda, while staying at the Comfort Inn,
stepped on a needle, and claims negligence and lack of due care on the part
of the defendants. This case is being diligently defended by the insurance
carrier of Ridge Road Hotel Properties and Hudson. The Company believes
that it has adequate insurance for any potential loss.
After taking into consideration legal Counsel's evaluation of all such
actions described above, management is of the opinion that the outcome of
each such proceeding or claim which is pending, or known to be threatened
(as described above), will not have a significant effect on the Company's
financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court
against the Company alleging breach of contract and damages of $906,250
relating to the Company's rescission of a warrant granted to them in
connection with the investment advisory agreement. In February 1994, the
Board of Directors of the Company determined that Ladenburg had been
otherwise adequately compensated for such services as were actually
performed, and voted to rescind the warrant. The Company has answered the
complaint, denying the relevant allegations, and asserting several
affirmative defenses. Discovery in the case has commenced and is
continuing. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result
has been made in the financial statements.
Page 8 of 20
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
partnerships which the Company exercises control for the six month period
ended September 30, 1995 and a combined summary of condensed financial
information for the partnerships which the Company does not control for the
six month period ended September 30, 1995.
Delray Beach Watertown Total
Hotel Properties Hotel Consolidated Unconsolidated
Limited Properties Partnerships Partnerships
------------------ ---------- ------------ --------------
Property and equipment
net of accumulated
depreciation $6,381,771 $ -- $6,381,771 $22,549,195
Current assets 169,039 11,875 180,914 1,979,530
Notes and mortgage
receivable - noncurrent -- 1,400,000 1,400,000 1,500,000
Other assets 147,877 -- 147,877 750,250
---------- ---------- ---------- ---------
TOTAL ASSETS 6,698,687 1,411,875 8,110,562 26,778,975
---------- ---------- ---------- -----------
Mortgage and notes
payable - current 52,011 -- 52,011 2,427,970
Other current liabilities 608,038 -- 608,038 1,104,930
Mortgage/Notes payable - non
current 6,282,923 -- 6,282,923 21,780,061
---------- --------- --------- -----------
TOTAL LIABILITIES 6,942,972 -- 6,942,972 25,312,961
---------- --------- --------- -----------
NET ASSETS (244,285) 1,411,875 1,167,590 1,466,014
=========== ========== ========== =============
Net Revenues 1,945,870 -- 1,945,870 6,742,061
Operating Expenses 1,715,692 -- 1,715,692 3,703,837
----------- ---------- ---------- -----------
Income from Operations 230,178 -- 230,178 3,038,224
Other Income (Expense), net (342,793) 70,000 (272,793) (2,552,201)
----------- --------- ---------- ------------
NET INCOME (LOSS) $ (112,615) $ 70,000 $(42,615) $486,023
=========== ========= ========= ==========
Page 9 of 20
5. Long Term Debt
Future minimum repayments under long-term debt are as follows:
Remainder 1996 $ 122,867
1997 184,718
1998 123,370
1999 130,273
2000 and thereafter 8,107,639
The Company is in the process of obtaining refinancing for the mortgage
payable by Delray Beach Hotel Properties, Ltd. and has received a
commitment letter dated June 5, 1995. The term of the loan is 10 years,
with amortization calculated on a term of 20 years, with monthly
payments of principal and interest. Interest shall be adjusted annually
at prime plus 1%. The current and long term debt on the financial
statements, along with the future minimum repayments, reflect the terms
of the commitment letter.
6. Line of Credit
In May 1995, the Company obtained a second line of credit of $750,000,
from a commercial bank, which bears interest at prime plus 1 1/4%.
Outstanding balances on this line are to be repaid no later than nine
months from the date of the draw. Amounts borrowed are collateralized
by substantially all of the Company's assets and personally guaranteed
by the Chairman and C.E.O. of the Company. At September 30, 1995,
$750,000 was borrowed under the terms of this line and $145,000 was
borrowed under the terms of the first line. As of October 9, 1995, the
Company has no funds borrowed under the terms of the two lines.
7. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles and
office space. Total rent expense under operating leases amounted to
$76,286 and $71,094 for the periods ending September 30, 1995 and 1994,
respectively. Future minimum lease payments under operating leases are
approximately - 1996 remainder - $57,397; 1997 - $121,680; 1998 -
$41,454.
As an equity partner in various hotel partnerships, the Company has
guaranteed portions of mortgages payable relating to the partnerships.
The guarantees range from 50% to 200% of the outstanding mortgages
payable to banks. Amounts guaranteed by the Company related to the
partnership's mortgages payable were approximately $3.5 million at
September 30, 1995. In addition, Delray Beach Hotel Corp., a wholly
owned subsidiary, has guaranteed Delray Beach Hotel Properties, Ltd.'s
mortgage payable to a bank which has an outstanding balance of
$5,334,934 at September 30, 1995. Under the terms of the new mortgage
negotiated for Delray Beach Hotel Properties, Ltd., the Company will be
jointly and severally liable on the new mortgage.
8. Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and
reporting for income taxes. The Statement requires that deferred income
taxes be provided to reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by current tax laws and
regulations. A valuation allowance is established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
Page 10 of 20
Deferred tax assets include loss carryforwards and deferred revenue.
Deferred tax liability represents the gross up relating to the purchase
of Hudson. At September 30, 1995, a valuation allowance has been
provided to reduce the Company's deferred tax asset.
At September 30, 1995, the Company has net operating loss carryforwards
for income tax purposes of approximately $2,300,000 which may be used to
offset future taxable income. These loss carryforwards will begin to
expire in 2003.
9. Note Receivable Non-Affiliate - Master Franchise Agreement On June 30,
1995, a Third Amendment was executed by Essex Microtel International
Lodging, Inc., ("EMILI") and the Company relating to the Canadian Master
Franchise Agreement. This occurred because the current economic
conditions in Canada prevented EMILI from meeting the Development
Schedule. The Third Amendment has extended the Development Schedule to
10 1/4 years, extended the period that the Company is to provide to
EMILI certain products, services and assistance to August 13, 1997,
temporarily suspended the requirement that EMILI not employ a training
director until the earlier of May 15, 1997, or the time EMILI has four
Microtels open or under construction, allowed EMILI to utilize the
Company's training facilities and trainers until such time that EMILI
has an operating Microtel open. In addition, the Company has obtained
the absolute right, at its option, to terminate the Master Franchise
Agreement in the event that the Company shall negotiate the licensing or
sale to a third party of the world-wide franchise rights. In connection
with this amendment, EMILI paid the Company its remaining financial
obligation. In connection with subsequent event (Note 13) the Canadian
Master Franchise agreement was terminated.
10. Receivables/Payables with Affiliates
The Company has advanced affiliated entities the following as of
September 30, 1995:
Fishers Road Hotel Properties, L.P. $101,757
Airport Hotel Properties, L.P. 46,300
Gatlinburg Microtel, LP 20,000
Brookwood Hotel Properties 64,500
950 Jefferson Road Associates 2,000
-------
$234,557
========
A wholly owned subsidiary of the Company has received advances from the
following as of September 30, 1995:
Brookwood Hotel Properties, LP $100,000
Jamestown Hotel Properties, LP 70,000
------
$170,000
========
As of October 27, 1995, all amounts were repaid to affiliated entities
by the wholly owned subsidiary.
11. Acquisition of Land
In May 1995, the Company purchased 2 acres of land in Plano, Texas, for
approximately $600,000, or $300,000 an acre. The parcel is zoned for
commercial use and is located north of Dallas, Texas, off Interstate 75
and is in proximity of major businesses and shopping centers. Funds
used to purchase this land were provided through the use of the
Company's line of credit. The Company is currently in the process of
developing this land for the future construction of a Microtel.
Page 11 of 20
12. Exclusive Development Agreement
On June 30, 1995, the Company entered into an agreement with the former
partners of S&E Hospitality Partnership where as one of the former
partners of S&E sold all of their assigned prepaid franchises (14) for
$200,000 back to the Company. The 14 prepaid franchises had been
recorded as deferred revenue with a value of $350,000 on the Company's
balance sheet prior to the transaction. This transaction resulted in a
$150,000 gain. The remaining 5 prepaid franchises are still being held
by the other former partner of S&E. In May 1995, one of the five
prepaid franchises was used for the Microtel opened in Colonie, New
York; and in July 1995 another was used for the Microtel opened in
Greensboro, North Carolina, and in September 1995, another was used for
the Microtel opened in Chattanooga, Tennessee.
13. Subsequent Event
On October 5, 1995, the Company signed an exclusive joint venture
agreement with U.S. Franchise Systems, Inc. in which USFS assumed
worldwide franchising and administration for the Microtel hotel chain.
The Company in return will receive $4 million over a three year period
in exchange for the exclusive franchise rights of the Microtel name and
various consulting services; $2 million was paid at closing, another $1
million will be paid at the first anniversary and $500,000 at the second
and third anniversary. In addition to the lump sum payment, the Company
will receive royalty payments from properties franchised by USFS.
Royalty payments will consist of 1% of gross room revenues from hotels
1-100; .75% from hotels 101-250; and .5% above 250 units. In addition,
the Company issued USFS 100,000 warrants exercisable at the Company's
common stock market price on October 5, 1995.
The Company has retained the right to franchise and construct an
additional twenty-three (23) Microtel properties and ten (10) "Suites"
properties (if offered by USFS), and to receive all royalties on the
fifty (50) Microtels (27 existing and 23 new ones to be undertaken by
the Company) and ten (10) Suites.
Page 12 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
Selected Financial Data (item 6); Management's Discussion and Analysis of
Financial Condition and Results of Operations (item 7); and Accountant's
Report, Financial Statements and Notes to Financial Statements (item 8) of
the Company's March 31, 1995 Annual Report on Form 10-KSB.
Results of Operations
---------------------
Franchise placement income for the six month period ended September 30, 1995
reflects the opening of three franchises (Colonie, New York; Greensboro,
North Carolina; and Chattanooga, Tennessee) of which two opened during the
second quarter ended September 30, 1995. Royalties for the six month period
ended September 30, 1995, have increased $70,187 over the six month period
ended September 30, 1994, an increase of 38%. This is attributable to
twenty-two franchised Microtels currently in operation as opposed to eighteen
in operation during the same six month period in 1994. Overall, management
fees for the six month period ended September 30, 1995 decreased $13,980, or
3%, from the same period in 1994. The decrease is a result of non-renewal of
contracts on four mature properties throughout fiscal 1995 and their
replacement with contracts on four properties during fiscal 1995 which are
all in a start-up mode. Development fees decreased $83,250 from the same
period in 1994. The decrease is due to a significant development fee charged
for a construction of a Microtel during the second quarter of 1994 which did
not reoccur during this fiscal quarter. During the six month period ended
September 30, 1995, the Company has four hotels under development in which
fees were charged compared to four during the same period September 30, 1994.
A significant increase in hotel revenues ($2,133,031, or 300%) is
attributable to the operations of a hotel which the Company leased (Inn on
the Lake) in November 1994. Twenty six percent (26%) of hotel revenue and
all of the Beach Club income relate to the operation of Delray Beach Hotel
Properties, Ltd., of which the Company is a controlling partner. Delray
Beach Hotel Properties, Ltd. hotel revenues increased slightly (5%) due to a
slightly higher daily room rate and higher occupancy from the prior year and
Beach Club income increased $66,579, or 6%, from the prior year due to
increased dues and food and beverage sales. Seventy four percent (74%) of
the hotel revenue for the period ended September 30, 1995 represents the
operations of the Inn on the Lake.
Selling, general and administrative expenses for the six month period ended
September 30, 1995 increased $1,921,249, or 85% from the period ended
September 30, 1994. $1,871,431, or 97%, of the increase represents the
operations of the Inn on the Lake, which the Company is leasing. Also,
expenses for the six month periods ended September 30, 1995 and 1994 include
the operations of the Company and its controlled affiliates (Delray Beach
Hotel Properties, Ltd. and Watertown Hotel Properties II). Expenses for the
controlled affiliate (Delray Beach Hotel Properties, Ltd.) remained
consistent from the same period last year. Expenses, excluding controlled
affiliates and the Inn on the Lake, for the six month period ended September
30, 1995, increased 4%, as compared to the six month period ended September
30, 1994. Depreciation and amortization increased $18,275, or 8%, due to
capital improvements performed in fiscal 1995 to Delray Beach Hotel
Properties, Ltd., a controlled affiliate. Amortization expense associated
with the adjustment of fair value of real estate investment will continue at
a current quarterly level of approximately $25,000 for the next 7 years.
Interest income for the six month period ended remained relatively consistent
with the same period in 1994. $70,000, or 57%, of the $123,431 relates to
interest on the mortgage receivable from Watertown Hotel Properties II. Of
the $459,062 in total interest expense, 63% relates to the mortgage financing
of an operating hotel entity (Delray Beach Hotel Properties, Ltd.). The
remaining relates to interest on the lines of credit, two convertible
debentures, note payable relating to purchase of partnership interests and
the Tonawanda bond issue. Other income of $150,000 represents the
reacquisition of 14 prepaid franchises for $200,000 from a former partner of
S&E Hospitality. The 14 prepaid franchises had been recorded as deferred
revenue with a value of $350,000 on the Company's balance sheet prior to the
transaction.
Page 13 of 20
Minority interest represents the elimination of the minority partners
interest in Delray Beach Hotel Properties, Ltd. and Watertown Hotel
Properties II. Equity in income/losses of affiliates represents net
income/losses incurred from the Company's equity investment in various
hotels.
The majority of income tax expense for the six month period ended September
30, 1995 represents deferred federal and state taxes related to net operating
loss carryforwards classified as Deferred Tax Assets on the Balance Sheet.
Also, certain minimal state liabilities were recorded, which are incurred by
the Company on a regular basis.
As a result of the above factors, net income of $219,122 and $341,579 was
reported for the three and six month periods ended September 30, 1995,
compared to net income of $90,312 and $147,679 respectively for the
corresponding periods in fiscal 1995. The net income per share for the three
and six month periods ended September 30, 1995 was $.05 and $.08, compared to
net income per share of $.02 and $.03 for the corresponding periods in fiscal
1995.
Shares used in computing net income per share for the six month period
increased from 3,262,400 for September 30, 1994 to 3,619,677 for September
30, 1995. The predominant factors for this increase are (i) stock issued
for consulting services (ii) stock options exercised, and (iii) additional
options and warrants included in the calculation due to an increase in the
Company's stock price. Consolidation of revenues and expenses of Delray
Beach Hotel Properties, Ltd. and Watertown Hotel Properties II provides no
additional net income or loss to the Company, than from reporting the
investment under the equity method of accounting.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At September 30, 1995 the Company had a working capital deficit of $262,669,
as compared to a positive working capital of $443,604 at March 31, 1995.
Cash and cash equivalents totaled $239,864. The reduction in working capital
from March 31, 1995 is attributable to a draw on the Company's lines of
credit to purchase land in Plano, Texas, and the reacquisition of previously
purchased franchises, which had not been reflected in income, at a
discount. (See Note 12). As of October 30, 1995, the Company has repaid
the entire balance on the lines of credit from proceeds received from the
sale of the worldwide franchise rights (see note 13).
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests increased $210,952 from March 31, 1995. The predominant factor for
the increase is due to cash contributions of $269,500 to various partnerships
and income/losses recorded from the various partnerships offset by cash
distributions received from the partnerships. Investment in real-estate land
represents land purchased for the purpose of future development or sale. In
May 1995, the Company purchased 2 acres of land in Plano, Texas, for
approximately $600,000 (See Note 11).
The majority of property and equipment reflected on the balance sheet relates
to real and personal property of Delray Beach Hotel Properties, Ltd. The
Company maintains an ongoing capital improvement policy at the property,
which is funded through the hotel and beach club operations.
On June 30, 1995, Essex Microtel International Lodging, Inc., the master
franchisee for the Canadian territory, paid its remaining obligation to the
Company, but has failed to meet its development schedule as of March 31,
1995. The Company, recognizing that the economic climate in Canada is not
favorable with respect to real estate development, executed an amendment to
the original agreement on June 30, 1995, which extended the development
schedule and modified other terms. (See Note 8 - Note Receivable Non-
Affiliate - Master Franchise Agreement).
Deferred tax assets represents federal and state future tax benefit from tax
loss carryforwards realized as a result of current year earnings and the
expected profitability in future periods, net of deferred tax liability
related to the acquisition of Hudson and the related temporary differences
associated with the difference in the financial reporting and tax basis of
the purchased assets.
Page 14 of 20
Other assets consist of a mortgage note receivable held by Watertown Hotel
Properties II in the amount of $1,400,000, collateralized by land and the
Microtel hotel located in Watertown, New York. Also, the Company provided a
$250,000 cash deposit to secure a ten year operating lease and management
contract of a full-service hotel located in Canandaigua, New York, from L, R,
R & M, LLC. One of the minority owners of L, R, R & M, L.L.C., is a greater
than 5% Microtel shareholder who is not involved in the management or
operation of the Company. Also, in January 1995, the Company received a note
from Delray Beach Hotel Properties, Ltd. for $1,000,000 due May 1, 2000.
Under the terms of the note, payments are required for interest only and are
calculated at 12% per annum. Minimum monthly principal payments of $7,500
will be required beginning May 1, 1996. Additional principal payments can be
made at any time, without penalty. The note does not appear on the face of
the balance sheet, as it is eliminated during consolidation. The Company was
able to provide these funds through the proceeds of a $1,500,000 subordinated
debenture.
In fiscal 1994, the first of the twenty hotels was opened under the exclusive
development agreement with S&E Hospitality Partnership (S&E) (see Note 11 -
Exclusive Development Agreement). In March 1994, a Termination of Exclusive
Development Agreement was executed by S&E Hospitality Partnership and the
Company, due to the occurrence of the second consecutive default by S&E on
the Development Schedule, which resulted in the exclusive territorial rights
reverting back to the Company. According to the terms and conditions of the
Termination Agreement, certain provisions survive; namely, that S&E retains
the right to develop the balance of the Microtels for which S&E has paid the
non-refundable franchise fees. Therefore, 19 Microtels to be developed by
S&E at any approved location within or outside of the originally defined
territory. In June 1995, the Company and a former partner in the S&E
Partnership agreed to have the Company buy back their prepaid franchises for
a discount. The Company paid $200,000 to repurchase 14 franchises valued at
$350,000. The remaining four prepaid franchises are assigned to the other
partner of the former S&E Partnership. In May 1995, one of the four prepaid
franchises was used for the Microtel opened in Colonie, New York, and in July
1995 one was opened in Greensboro, North Carolina. The remaining $50,000 has
been classified as deferred franchise revenue on the September 30, 1995
balance sheet. The Company will recognize revenue as the franchised hotels
are opened. The remaining $100,000 of the $155,000 total deferred revenue
(current and long term) represents deposits submitted by franchisees to
secure a Microtel franchise which will be built at a later date. During the
quarter ended September 30, 1995 the Company recognized revenue for the
opening of two Microtels, while receiving a deposit. The deferred revenue
will be recognized as each franchised hotel is opened.
Long-term debt is substantially comprised of a $5,364,628 mortgage on the
real property of Delray Beach Hotel Properties, Ltd. Debt service will be
paid through income from operations. The Company has received a commitment
letter dated June 5, 1995, from a commercial bank in Florida and intends to
refinance the mortgage by November 10, 1995, in accordance with terms in the
commitment letter. The remaining long-term debt relates to Microtel issuing
two $1,500,000 convertible subordinated debentures, a note issued by the
Company for the purchase of various partnership interests and a bond with the
Town of Tonawanda relating to a land purchase.
Shareholders' equity increased to $2,815,602 as of September 30, 1995 from
$2,314,833 as of March 31, 1995. The four factors which affected the level
of shareholders' equity are represented by (i) an increase of $215,350 for
shares issued relating to the exercise of stock options, (ii) a decrease of
$63,660 resulting from preferred dividend payments, (iii) sale of treasury
stock, and (iv) an increase of $341,579 due to the net income for the six
month period ended September 30, 1995.
The Company has, in total, $1,250,000 in two lines of credit, which are
available for short term requirements which may arise. The Company believes
it has sufficient resources from its present cash position to meet its
current obligations and believes that its cash position and revenues from
operations are sufficient to meet its cash requirements for the next twelve
months. The Company has not been negatively impacted by inflation during any
of the periods presented.
Page 15 of 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On October 26, 1990, a complaint was filed in Palm Beach County Circuit
Court, Florida, by Seagate Beach Quarters, Inc., a Florida corporation,
seeking damages plus interest and costs, against Rochester Community Savings
Bank ("RCSB"), a New York based bank, and naming Hudson as a co-defendant.
On December 6, 1990, Delray Beach Hotel Properties, Ltd., a Florida limited
partnership controlled by Hudson, purchased the Seagate Hotel and Beach Club
from Rochester Community Savings Bank. The Purchase Contract includes an
indemnification of Hudson against any action resulting from previously
negotiated contracts between RCSB and third parties. The requested relief in
this case, Seagate Beach Quarters, Inc., vs. Rochester Community Savings
Bank, etc., et al, including Hudson Hotels Corp., etc., was based on
allegations that RCSB, through its subsidiary, Shore Holdings, defaulted in
its obligations under a Contract for Purchase and Sale, and failed to go
forward with the transaction due to tortious ongoing negotiations between
RCSB and Hudson, and that there was a breach of contract by RCSB. RCSB is
diligently defending this suit, and is holding Hudson harmless. On March 17,
1994, the court granted summary judgement in favor of all defendants. That
judgement has been appealed; on appeal, the summary judgment in favor of
Hudson was reversed. Attorneys for Hudson are preparing a motion for
rehearing or clarification. On September 8, 1994, Seagate Beach Quarters,
Inc., sued Delray Beach Hotel Properties, Ltd., Delray Beach Hotel Corp. and
Shore Holdings, Inc., in a cause of action for conspiracy and tortious
interference with a business relationship based on essentially the same facts
stated above. On January 27, 1995, the Court issued an order dismissing the
amended complaint as to Delray Beach Hotel Properties, Ltd. Plaintiff has
field a notice of appeal from that order. On September 18, 1995, Seagate
Beach Quarters, Inc. filed a notice of voluntary dismissal against Delray
Beach Hotel Properties, Ltd.
On February 11, 1993 a complaint was filed in the Western District of New
York, United States District Court, by John Miranda, Susan Miranda and
Christopher Miranda, seeking damages and costs against Quality Inn
International, Choice Hotels International, and naming Hudson as a co-
defendant. The requested relief in this case, John Miranda and Susan Miranda
and Christopher Miranda vs. Quality Inns International Inc., Choice Hotels
International, Inc., Ridge Road Hotel Properties, Ridge Road Hotel Properties
d/b/a Comfort Inn, a/k/a Comfort Inn West, Hudson Hotels Corp., and Jennifer
L. Ansley, as Executrix of the Estate of Loren G. Ansley, was based on
allegations that John Miranda, while staying at the Comfort Inn, stepped on a
needle, and claims negligence and lack of due care on the part of the
defendants. This case is being diligently defended by the insurance carrier
of Ridge Road Hotel Properties and Hudson. The Company believes that it has
adequate insurance for any potential loss.
After taking into consideration legal Counsel's evaluation of all such
actions described above, management is of the opinion that the outcome of
each such proceeding or claim which is pending, or known to be threatened (as
described above), will not have a significant effect on the Company's
financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court against
the Company alleging breach of contract and damages of $906,250 relating to
the Company's rescission of a warrant granted to them in connection with the
investment advisory agreement. In February 1994, the Board of Directors of
the Company determined that Ladenburg had been otherwise adequately
compensated for such services as were actually performed, and voted to
rescind the warrant. The Company has answered the complaint, denying the
relevant allegations, and asserting several affirmative defenses. Discovery
in the case has commenced and is continuing. The ultimate outcome of the
litigation cannot presently be determined. Accordingly, no provision for any
liability that may result has been made in the financial statements.
Item 2. Change in Securities - None
--------------------
Page 16 of 20
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the annual meeting of the stockholders of the Company held on August 15,
1995, the stockholders of the Company approved the following:
The shareholders approved the appointment of the Board of Directors
consisting of five Directors. Each Director shall hold office until the next
annual meeting of shareholders and until the successor of the Director is
duly elected and qualifies.
Appointment of Bonadio & Company as the Company's independent public
accountants for the year ending March 31, 1996.
The table below sets forth the number of votes cast for, against or withheld
for each nominee to the Company's Board of Directors, as well as votes cast
for other proposals discussed above at the August 15, 1995 shareholders
meeting:
Election of Directors
Nominee For Against Abstained
------- --- ------- ---------
E. Anthony Wilson 1,978,710 1,950 --
Michael Cahill 1,978,710 1,950 --
Bruce A. Sahs 1,978,710 1,950 --
Ralph L. Peek 1,978,710 1,950 --
Robert Fagenson 1,978,710 1,950 --
As to the proposal to appoint Bonadio & Company as the Company's independent
public accountants for the year ending March 31, 1996:
1,966,035 shares have voted FOR
3,000 shares have voted AGAINST,
11,625 and shares have ABSTAINED.
Item 5. Other Information
-----------------
On September 7, 1995, the Registrant entered into a Joint Venture Agreement
with U.S. Franchise Systems, Inc. relating to the sale of franchises for the
Microtel system. The transaction proposed pursuant to this Joint Venture
Agreement was consummated on October 5, 1995.
Pursuant to the joint Venture Agreement, Microtel has transferred to U.S.
Franchise all rights to franchise the Microtel concept and system world-wide.
This includes the rights to the Microtel name and trademark. U.S. Franchise
has agreed to a development schedule that calls for two hundred-fifty (250)
new Microtel franchise units to be open or under development within five (5)
years after the Commencement Date. U.S. Franchise has also agreed to use its
best efforts to register its franchise offering whenever required in the
United States. The Registrant has agreed to provide on-going consulting as
required by U.S. Franchise.
The Registrant has retained the right to franchise and construct an
additional twenty-three (23) Microtel properties and ten (10) "Suites"
properties (if offered by U.S. Franchise), and to receive the full royalties
on fifty (50) Microtels (27 existing and 23 new ones to be undertaken by
Registrant) and ten (10) Suites. In addition, the Registrant will receive
ongoing royalties in consideration of the transfer of its trademark for new
properties licensed by Registrant to third parties, as follows:
Page 17 of 20
% Revenues Number of Properties
1% up to 100
3/4% 101 to 250
1/2% 251 and over
In consideration of the Joint Venture Agreement, U.S. Franchise paid to
Registrant $2,000,000 at closing and will pay $1,000,000 on October 5, 1996,
$500,000 on October 5, 1997 and $500,000 on October 5, 1998.
Registrant has retained all of its assets relating to its business of
development, management, operation and ownership of hotel properties, and
plans to use the revenues from the Joint Venture to expand those businesses.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
Exhibit No. Description
----------- -----------
10.24 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: There were no reports on Form 8-K filed during the second
quarter ended September 30, 1995.
Page 18 of 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROTEL FRANCHISE AND DEVELOPMENT CORPORATION
----------------------------------------------
(Registrant)
Date: 11/3/95 /s/Bruce A. Sahs
---------------------------------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 11/3/95 /s/Taras M. Kolcio
--------------------------------------
Taras M. Kolcio, Controller
Page 19 of 20
Exhibit Index
-------------
Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
Exhibit No. Description
----------- -----------
10.24 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: There were no reports on Form 8-K filed during the second
quarter ended September 30, 1995.
Page 20 of 20